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Washington (CNN)An IRS watchdog group has found that the agency has improved how it handles applications to become one of the coveted political nonprofits that are upending campaign finance.

The Obama administration caught strong criticism after allegations emerged that the IRS was scrutinizing certain conservative groups more heavily than others in their quests to earn tax-exempt status. As long as the groups, organized under section 501(c)(4) of the tax code, prioritize social welfare over political work as their main task, they are allowed to shield their donors' identities.

An inspector general report on Thursday said the tax agency had acted on many of the recommendations made by the Treasury Inspector General for Tax Administration in 2013, including having "eliminated the selection of potential political cases based on names and policy positions."

The American Center for Law and Justice, which is leading a lawsuit challenging the IRS for the targeting, said in a statement that the agency "still remains institutionally incapable of self-correction."

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Political nonprofits spent $138 million during the most recent midterms cycle, according to the Center for Responsive Politics. The Treasury Department is attempting to craft new rules to govern the spending groups.